We drill a hole... that's why it comes with the washer/nut on it.

No you shouldn't kink any hoses...

I'm glad you mentioned about those adjusters. It is our rebound control, it is an RSW valve that throttles air flow in and out of the bottom of the shock. Screwing it in to the left increases air flow, out to the right decreases. If you increase air flow you increase the softness of the rebound and vice versa. This lets you dial in your comfort level. A good way to do this is when you have your shock installed , give it a simple bounce test and keep adjusting from there. (sometimes it's alittle easier if you have a second person to help you so you don't have to keep getting off your bike) Once you have it dialed in where you like it, you should be good to go. From that point on whether you have multiple riders or different conditions, you're at the point where you will adjust your ride height and pressure for changes, but your rebound will always be where you like it!

The one that is on the solenoid is to adjust the speed at which your system releases air...
...keep in mind, you can throttle it out (to the right) so much that you can choke all the air in!